Counting Drugs and Prostitution in GDP Makes a Mockery of Budget Rules

A police dog searches for drugs in boxes of food during an operation against drug smugglers in Scampia a suburb north of Naples, Italy Photograph by Mario Laporta/AFP via Getty Images

The Italians have a word for it: sprezzatura, or studied nonchalance. The news that Italy plans to include prostitution and illegal drugs in gross domestic product sounds like a joke. But it’s not just an Italian initiative. New European Union rules require member states to include in GDP the value of all income-producing activities, including prostitution, the production and consumption of illegal drugs, and black market sales of cigarettes and alcohol.

The beauty? By counting prostitution and drugs in output, Italy will raise its GDP and thereby lower the ratio of debt to GDP, which will make it easier to comply with European Union rules on indebtedness. The same will go for other countries. That’s sprezzatura.

Governments of European Union members are not supposed to let their annual deficits exceed 3 percent of GDP or accumulated debt exceed 60 percent of GDP.

This pyramid portrays the detailed process that the European Union has established to deal with countries that fall out of compliance. On paper, the penalty is a fine of 0.2 percent of GDP, plus a “variable component” that can range up to 0.5 percent of GDP annually as long as the breach continues.

In reality, the European Union’s bark is worse than its bite. A fine would only make a country’s deficit worse. At the moment 17 member countries are being monitored under what the EU calls “excessive deficit procedures,” while another nine (Italy among them) have emerged from excessive deficit procedures. Only two member countries, Estonia and Sweden, have never had excessive deficit procedures.

Countries outside the European Union that want to make their economies look larger may want to follow suit. Italians have no monopoly on drugs and prostitutes. According to research by two Turkish economists, Ceyhun Elgin and Oguz Oztunali of Bogazici University in Istanbul, the shadow economy (not just drugs and prostitution) averages just under 18 percent of GDP in OECD and EU countries. It’s 42 percent in Latin America, 37 percent in post-socialist countries, 32 percent in the Middle East-North Africa region, 43 percent in sub-Saharan Africa, and 33 percent in Asia, by their estimates.

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